A business valuation is the process of estimating the financial value of an organization. It’s important to make financial reports, dividing shares by selling all or a part of your company, creating succession plans and obtaining finance.
The value of a business can be based on assets either in terms of earnings or market value. The most commonly used methods for valuing a company include the multiples of earnings, or times-revenue method, and the discounted cash flow technique.
The times-revenue or earnings-multiples approach uses your company’s revenue or earnings and multiplies it by an industry-standard multiple to arrive at the value. This can be a good way to get a sense of what your business is worth but it doesn’t necessarily give a full picture. A cafe that earns $250k a year, and is valued five times that amount, could be worth more if it’s run by a solid brand name or excellent dining experience.
Another method that is commonly used is the formula for book value. This method is based on adding the total value of your assets, such as equipment, real estate and inventory, and removes liabilities that are due loans and debts. This method is quick and easy, but it may not be a good reflection of the true worth of your business, especially if you are looking at potential growth. Investors and buyers are often more interested in the potential for future profits than the current assets. It is essential to have an appraisal completed by a business appraiser or broker before you make an investment with an outside company.
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